student loans Archives - Bankers Anonymous

August 25, 2022June 14, 2023

Against Broad Student Loan Forgiveness

May 11, 2022 was a financial watershed for my friend Laura Davenport. A teacher at Alamo Colleges in San Antonio, on that day she received an email from the Department of Education informing her that her $155 thousand of student loan debt had been suddenly forgiven – from one day to the next – through a program called Public Service Loan Forgiveness (PSLF.) She couldn’t believe it at first.

She had been working for years to qualify for just this event. She described to me a Kafka-esque journey with her loan servicer and the Department of Education, in search of a way to take care of the loans she took out for her Master’s degree and PhD in creative writing. Between 2009 when she completed her degree and now – despite more than 10 years of payments – her loans had grown from $119,921 to $155,399.

I bring this anecdote up in part to call attention to the PSLF. If you or someone you love has student loans and has or will accrue ten years in public service work or non-profit work, they may qualify for this massive debt relief. There’s an October 2022 deadline for getting your case for loan forgiveness reviewed by the Department of Education, with relaxed standards for qualifying, compared to the past.

I also bring this up because the Biden Administration has strongly implied that it will soon forgive $10,000 of debt (or more!) in a kind of blanket amnesty program for student loan borrowers. A progressive movement has grown to a crescendo in the past few years in favor of broad-based student loan forgiveness.

I’m the kind of jerk that thinks this type of amnesty is a big mistake. I don’t really enjoy writing financial opinion pieces that I know will garner a lot of hate mail. Ah well, I’m still going to state my unpopular view. Regular student loan forgiveness currently contemplated by the Biden administration (of $10,000, or more!) is a bad idea.

The pro-student loan forgiveness movement makes the following points.

The cost of higher education has become outrageous. Tuition Inflation has run at an average of 6.2 percent for the past 20 years, well in excess of the rest of the economy, and certainly of wage increases.

State universities used to be an affordable option, but no longer. Over the past 20 years the cost of public education has nearly tripled on average. The children of middle class families cannot afford public education. Despite robust public university systems, the average student borrower in Texas has over $31,000 in debt. The average!

Unlike nearly every other type of personal debt, student loans are not dischargeable in bankruptcy, making it a harsher debt burden than credit cards, home, car, or business loans.

Student loan debt balances are bigger than credit card debt balances, roughly $1.7 trillion compared to $840 billion. About 13 percent of Americans have student loan debt, making it a widespread burden.

Wealthy countries in Europe do not make higher education unaffordable like we do. It’s typically free or very affordable there.

I agree with all of this. And yet, I still don’t think the Biden administration should offer $10,000 or more in student loan amnesty.

I oppose wide-scale debt forgiveness from two angles. First, student debt forgiveness is inequitable.

In part because of the demographic of who enrolls in higher education, and in part because of high debt balances that accrue to high-income potential degrees like medicine, law, and business, academic studies all conclude that debt forgiveness plans are regressive. That means that the higher benefits of this public good goe to higher income populations, while the lowest income populations enjoy less benefit. Understood similar to a regressive tax policy, broad debt forgiveness doesn’t pass the fairness smell test.

Second, it’s bad politics. Here’s a partial list of people who have good reason to resent broad based higher education loan forgiveness:

Americans who have not studied for a higher degree. (This is a majority of Americans, by the way. Only 48 percent of people 25 or older have completed an Associate’s, Bachelor’s or higher degree).
Americans who took out higher education loans and who have paid their debts back one way or the other. They did the hard thing, and now they will feel like suckers.
Americans who will take out higher education loans in the future but who will not receive loan forgiveness. When my girls go to college, by an accident of birth, they will most likely not get their debts forgiven.

This is a recipe for political resentment. Of course we may anecdotally know or be somebody “deserving” of debt forgiveness, but as a matter of policy it’s not a good idea.

So what kind of relief should we offer? I’m very pro debt forgiveness for people who have done public service. The military, government service, public education – these all seem like worthy ways to earn debt relief. You earned less with your degree than you could have in the private sector, but you contributed to society, and then society pays you back. A fair deal, and politically palatable.

As for Davenport, who qualified after working 10 years in public service, I’m thrilled for her. During the last administration, PSLF approvals dropped to nearly non-existent, to the point that the Government Accountability Office found that a mere 1 percent of applicants qualified by 2019.

A shift in policy in the past year however has suddenly opened up borrowers for massive relief.

A second group that should get relief are people scammed by higher education. On June 1st the Education Department wiped out $5.8 billion owed by 560 thousand student borrowers to Corinthian College, which went bankrupt after 20 years of dubious promises and under-delivery. Seems right to me, but it would have been even more satisfying if the Corinthian College leadership had been prosecuted for costing the public billions of dollars.

The Biden administration’s plan to simply forgive loan debts – not linked to service – seems unfair and politically unwise.

A version of this post ran in the San Antonio Express-News and Houston Chronicle.

Please see related posts:

Past Student Loan Forgiveness Failures

Not Holding my breath on Student Loan Forgiveness

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February 3, 2021February 3, 2021

Student Loan Forgiveness – Not Holding My Breath

This past summer, during two different personal financial consulting sessions for two separate 30-somethings, I was struck by something both clients said about their student loans balances. One carried $120,000 in debt, the other about $40,000. I worried about their sizable student loan. They did not.

Both said, in effect, “I’m not going to pay off my student loans early because if Biden wins my loans will probably be taken care of.”

I was stunned. That is not at all what I expected to happen this past summer. Biden won, but it is still not at all what I expect from his administration.

An estimated 44 million Americans carry an estimated $1.5 trillion in student loan debt. The student loan debt burden is higher than credit card debt. Since the pandemic-relief CARES Act passed in April 2020, borrowers have had the option to defer student loan debt payments without interest accruing until December 31, 2020. Absent further action, student loan payments become due again in a few weeks. This backburner financial concern just became a frontburner issue.

Despite its newfound urgency, the apparent belief by some in a future student loan jubilee – far more widespread than I had previously imagined – seems misguided.

The belief doesn’t come from nowhere, however.

As President-elect, Joe Biden raised hopes on this front, specifically by calling for up to $10,000 in student loan debt forgiveness for graduates who pursue public service. His campaign also called for specific income-adjusted payment plans. He has proposed that if you make less than $25,000 per year, you could defer payments without accruing interest. Above $25,000 in income, borrowers could pay 5 percent of “discretionary income” toward debt, with a promise of forgiveness 20 years from now after full payment compliance. The income-calculation math already begins to sound quite complicated with this second proposal regarding disposable income-adjusted payment plans.

Besides complicated math, the politics is complicated too. How would such a bill pass? Could it be achieved through executive order, or would Congress need to pass a law?

We can easily imagine what people on different sides of the political aisle say in this debate. Trump’s Education Secretary Betsey DeVos bashed the idea as a “truly insidious notion of government gift giving.”

On the other side, leading Democratic Senators such as Chuck Schumer and Elizabeth Warren have argued that President Biden has the authority to cancel up to $50,000 in student loan debt through executive action.

One part of thinking about generous student debt forgiveness is whether it efficiently achieves what I understand is the goal Schumer and Warren seek. They want to level the economic playing field. They want a student debt policy that would tend toward economic equality.

Enter, data. Economists at the University of Chicago argue in a November 2020 whitepaper “The Distributional Effects of Student Loan Forgiveness” that student debt forgiveness mostly does not achieve that goal of greater equality.

The benefits of universal student loan forgiveness, of the type Schumer and Warren advocate, would skew mostly to upper income people.

The economic effect of universal student loan forgiveness is what economists call “regressive,” meaning it benefits higher earning folks far more than lower earning folks. The economists estimate that debt forgiveness like this would be almost six times more beneficial to borrowers in the top decile of earners than borrowers in the lowest decile of earners.

Why is that? The biggest reason is that higher student loan totals actually correlate with higher incomes. So on average, the people who get the biggest benefit from large student loan forgiveness are, on average, higher earners. This basic finding should at least give us pause that the Schumer and Warren proposals are an effective means of achieving their goal of reducing inequality.

In addition, intuitively, we can see that people who do not attend any college – frequently, lower earners – would receive none of the $10,000 to $50,000 benefit advocated among Biden’s supporters.

I understand if you are reading this while feeling broke and needing $40,000 in loan forgiveness, that debt forgiveness does not feel personally regressive to you. It would in fact feel really good. I get it. But public policy isn’t about your specific situation. It is, at best, about achieving collective goals through fairness and efficiency.

We already have in place certain programs for student loan forgiveness. The current version of loan forgiveness for public sector employees is something called the Temporary Expanded Public Service Loan Forgiveness.

The Government Accountability Office (GAO) issued a report last year which says that Secretary Devos’ department appears to have hewed closely to her personal beliefs, rejecting 99 percent of applications to this program. Clearly, that isn’t working in its current form.

The University of Chicago economists point out that expanding income-based student loan deferral and forgiveness could be accomplished through existing programs, although clearly under different leadership and expanded criteria for approval. Under scenarios they study, the benefits of loan forgiveness could be shifted down from top earners to middle earners under certain circumstances. It still remains the case, however, that folks who do not borrow for higher education – likely the same ones suffering at the bottom economic rungs of society – do not benefit from student loan forgiveness programs.

Considering the political side, it seems that universal or even generous student debt forgiveness is a lot more controversial than its proponents think it is. Unless it is framed carefully, higher education student loan forgiveness will make many people very angry. Recalling my conversations from this past summer, I got the sense that these borrowers considered debt forgiveness non-contentious. I doubt it.

Certain types of student loan forgiveness are not politically contentious. Military service veterans – and their children too – receive extraordinarily generous tuition waivers or educational subsidies. Military benefits like this are not controversial, although the financial benefit per person is somewhat staggering. My wife benefitted from a loan forgiveness program for her $180,000 of medical school debt, by qualifying for and pursuing a medical research career valued by the National Institute of Health. Certain types of work following education can seemingly transform our perceptions of socialistic “government gift giving” to patriotic “thank you for your service.”

It feels like the issue is not so much debt forgiveness as a concept, but rather whether forgiveness feels earned and societally useful. If Biden does pursue these policies, he will have to convince skeptics about the earned and societally useful part, as well as address the regressive nature of universal student debt forgiveness.

A version of this post ran in the San Antonio Express News.

Please see related post:

The Effective Nationalization of Student Loans

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July 6, 2017July 6, 2017

Is College Worth It?

I always enjoy a good debate like “Is X worth it, financially?”

When X = College the debate seems particularly fraught.

A friend sent me a link to a blogger Erik Rood who makes a nice case for why investing in college does not pay as well as we might think, compared to competing financial opportunities.

Rood presents the thought experiment of two eighteen year-olds. One borrows the cost of college, but instead of attending college invests in the stock market for twenty-four years instead, and earns the average salary of a high school graduate beginning at age eighteen. The second borrows the same amount to pay for college, attends for four years, and then goes to work four years later, earning the average salary of a college graduate for the next twenty years. The punch line is that the “return on investment” for the 18 year-old high school graduate who invested her tuition in the stock market instead of going to college is higher under a majority of scenarios, compared to the college graduate.

Rood references Payscale.com’s data for approximately 1,250 institutions, and he adjusts for the probability of actually graduating from college when calculating investment returns. He also specifically measures the previous 24 years of stock market returns, from 1993 to 2017, a particular moment in time that yielded a 7.1 percent return. Only about 10% of institutions show a “return on investment” via graduates’ salaries that exceeds the stock market returns over that period.

One obvious caveat to Rood’s analysis is that 18 year-olds generally cannot borrow a few hundred thousand dollars to invest in the stock market for twenty-four years, leaving his analysis purely in the realm of the theoretical.

Still, his big idea compels me: There are plenty of scenarios in which getting a four year college degree hardly makes pure financial sense, versus other uses of the money.

Finance columnist Scott Burns and his co-author Laurence Kotlikoff make a related-sounding argument in their book Spend ‘Til The End

regarding the lifetime consumption power of students attending private four-year colleges, versus someone who goes to work straight out of college. According to their math – which admittedly assumes borrowing money to attend an expensive 4-year college, at full-tuition – the college graduate only enjoys a surprisingly thin 10 percent higher expected lifetime living standard compared to the average high school-only graduate.

Obviously, if an eighteen year-old’s parents can pay, and the entire cost of college doesn’t need to be borrowed, the calculation changes for the student, who can immediately enjoy average higher earnings after graduating. But while that is pleasant for the child of relatively affluent parents, it doesn’t change the economics of the choice to attend, or not to attend, a costly college. It still may not make sense from a pure economic standpoint, given the thin 10 percent advantage gained by the college graduate.

I don’t think the correct conclusion to this analysis is to urge your favorite 18 year-old student to just “turn on, tune in, drop out,” get a job, and just like chill, man. I’d summarize the correct conclusion rather as: The pure financial returns to a costly education may not be as high as you think, and the more you pay, the less likely you are making a sure-fire good-money bet.

We can admit that this type of analysis make big assumptions that weaken the practical uses we might make of the “Is college worth it, financially” analysis for our own specific lives.

First, data on earnings will show the median, or average, of earnings from graduates of college. Many will earn more, many will earn less, but the entire cohort will include people who might not need to work for a living, or include people who decide not to work outside of the home. For people planning a life as the primary breadwinner, the “average earnings” data will probably under-estimate their earning potential.

Furthermore, for people who prioritize earning money after college, we would expect certain types of engineering degrees to lead quickly to higher-paying work, while less-technical degrees have lower pay, at least in the first few years.

We also quickly note that the price of a 4 year undergraduate degree varies tremendously, not only between public institutions which tend to be more affordable than private institutions, but also between the stated “sticker price” of college and the true cost, after merit and financial aid scholarships. Clearly, any financial calculation in which the annual price of the thing being analyzed varies between zero and $65,000 per year has some wiggle room for debate.

Part of what’s unsatisfying about this particular “is X worth it, financially” debate is that we have almost an infinite variety of variables, from quality of educational institution, to course of study, to cost of education, to professional goals around making money. Averages don’t really capture all that complexity.

Of course, the most important answer to the debate is that attending college is not solely, or even primarily, a financial transaction. We are not abstract economic actors mechanically trading dollars and time units of education today for dollars in the distant future. We are also concerned with developing our capacity to understand our world, to develop our greatest human potential, and to expand the limits of our soul.

I’ll have much more to say about that topic in my new weekly philosophy column “An Expanded Soul,” shortly after I launch my weekly sex advice column tentatively titled “The Smug Married.” Juuust kidding. I’ll try to stick to finance topics, as limited as that can sometimes seem, when compared to the wider world.

A version of this post ran in the San Antonio Express News and the Houston Chronicle.

Please see related posts:

Saving for College

529 Accounts for Grandparents

Interview With College Advisor – Part 1 – The Rising cost of College

Interview with College Advisor Part 2 – Is the Financial Model Broken?

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July 22, 2016July 22, 2016

Ask An Ex-Banker: Use Savings Or Debt To Pay For School?

Note: An ex-student of mine reached out to ask a question many face… Is it best to use savings and investments for graduate school, or to take out loans?

Dear Banker,

I saw you answered a question from a former student about paying down debt and being unemployed on your blog. So I thought I would give it a shot! I am going back to school in January for 1 year accelerated program that will cost 40k-50k, I am not quite sure yet.

Side note: I thankfully do not have loans from undergrad.

So I will have to take out student loans but I am unsure if I should take out the whole 40k-50k or use some of my assets to have less debt after I finish.

I currently have $9,000 in Betterment.com and individual investments with Capital One, $12,000 in Mairs and Power mutual fund that my parents put money in since I was a child. I also have $3,000 dollars in my savings account. I know I shouldn’t use all the money I’ve invested and saved but I was thinking maybe $10,000 dollars to have less students loans to pay back? I’m not sure what is a better decision financially. What would you suggest?

As well, I am going back to school to be a nurse so I can assume that my salary will be around 50k-60k a year. According to this website http://www.allnursingschools.com/nursing-careers/registered-nursing/salary/

I saw your blog on Facebook and thought I would ask!

Thanks,

M.C. (San Antonio, TX)

—

Hi MC,

Thanks for your question and for thinking of me. I’d like to think a few of the things we talked about in class were helpful.

I hope post-College life is treating you well. Congrats on having real savings and investments at this point…this is really commendable. Plus, no undergrad debt is also a blessing. A good place to be! About your future decision to use savings vs. take out debt for a nursing degree:

I don’t think there’s a single obvious solution. You could approach this various ways and still be making the ‘right’ choice. Also, I’d probably need more info on your situation to give more confident advice. But, here’s the principles I would keep in mind:

1. Student loans – especially for a professional upgrade in skills – are not “bad debt.” Mostly they have low interest rates, with generous payback terms. If they help you achieve a good salary and life-satisfaction, they are “good debt.” $50K of nursing school debt is a lot, but manageable in the long run. The fact that you’ve got some savings and investments already also suggests that you are able to live below your means, which bodes well for your ability to pay back debt over time after you get training and when you are earning money again.

2. If any of your Betterment, Capital One, or Mairs & Power accounts investments are in retirement accounts – tax advantaged accounts like an IRA – don’t take any money out of there to spend now. You might pay taxes and penalties to extract the money, so its better to leave those for the next 40 years to accumulate compound returns.

3. For invested money not in retirement accounts, its ok to take the money out and spend some on a worthy project like a professional upgrade. BUT…if you’re able to resist taking money out, it’s better for you in the long run. It’s so very difficult to actually accumulate savings and investments – especially when you’re in your twenties – that I think you should try extremely hard to preserve it, invested in the markets. This will mean more debt (and therefore more risk) but it seems justifiable, at least to me.

4. Leaving money invested in stocks/ mutual funds is tax efficient (meaning, every time you sell you’ll owe taxes on the gains.).

5. It’s also slightly riskier (stocks/mutual funds can lose value). But the longer you can leave them alone untouched, the better your prospects for building wealth with that money.

6. I think, psychologically, its easier to save and invest if you already have something saved, rather than zero. So I wouldn’t want you to go to zero on your investments.

Those are my thoughts. Feel free to write back or call if you want to discuss/clarify/argue about any of this.

By the way, how do you like Betterment? I haven’t really explored it but it seems like the targeted solution for your demographic. I’ve been enjoying an app called Acorns which I quite like. I wrote about it here: http://www.bankers-anonymous.com/blog/check-out-this-acorns-thing/

Michael

—

MC’s response:

Thanks so much for getting back to me! I’m sorry it took me a while to respond I went away for a week right when you wrote me back.

I was thinking that it would be better in the long run to not touch my investments but taking out such a big loan does make me nauseous when I think about it. However, I think I will stick with that strategy because I know if I leave nursing school with no savings I won’t feel good about that either. Thanks for going through the pros and cons its way more helpful then my internet searches have been!

I don’t have an IRA right now but I know I should set up a Roth IRA soon but I wasn’t sure yet if I wanted to use that money for school.

As for Betterment, I really like it! I started an account in August 2011 and just give about 60 dollars a month. According to my performance chart my return rate is 37% with an allocation of 100% in stocks. If I had 80% stock and 20% bonds it would be 44% right now. My original allocation was actually 70% stocks and 30% bonds but after your class I decided to try 100% stocks which, just like Acorns, Betterment refers to as ‘aggressive”. The majority of the investments are in different Vanguard funds and iShares. I like that part of it as well because if I’m not mistaken to open these account individually sometimes you need 1,000 or up to 3,000 dollars. I think Betterment is great for people my age! I always tell my friends to sign up who don’t know anything about investing.

Thanks again for responding and teaching a great class I think all students should be required to take it!

—

MC, Ok good luck! You’re going to do great, because you’ve already done the hard part, which is to begin saving and investing in your early 20s.

–Michael

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July 22, 2015

As An Ex-Banker: Student Loan Repayment

Hello Professor!

This is your former student, one year post personal finance class, and I am in need of advice.

Here’s the backstory. After spending one year in the IT Consulting world, making 70K and being equally stressed to the detriment of my health, I jumped ship (per the advice of my employer, they noticed I wasn’t sleeping). I left on good terms and with a fair severance pay. At this point of life re-evaluation I like the idea of taking however much time is necessary to ensure that misery is not a part of my daily routine at my next gig.

I have about 30K in student loans not paid off, interest rates ranging from 3.4% to 5%. The actual breakdown:

Loan A, minimum monthly payment $130/mo for 120 months: [12K @ 5%];
Loan B, total 18K, minimum monthly payment for all of Loan B $150/mo for 120 months [10K @ 3.4%, 5K @ 4%, and 3K @ 4.5%]).

My monthly expenses run between 1K to 1.5K and I have around 15K in savings (not including emergency funds, which is 3K and then 4K in a HSA account which can only be used for health expenses, I’m wanting to use all of that 15K towards paying off loans).

What advice do you have for planning my budget? I want to remove as much principal from my loans now to lower my interest payments. I may be able to defer paying monthly payments with no interest accruing for both my loans citing unemployment as the reason, another case might involve interest accruing as normal but monthly payment not required.

Any and all advice would be appreciated, thank you! Let me know if any of this info needs clarifying.

Sincerely,

AF in Houston

——————

Dear AF,

Thanks for reaching out, I’m glad to hear you’re continuing to track a lot of the things we discussed in the Personal Finance course last year.

Congrats on building that cash cushion – that’s admirable and rare for anyone one year out of college. It sounds like unemployment is not as scary to you as being stressed out – so the cash cushion allows you to take some time to figure out the next step, which is really great.

The way I read your note, you mentioned three financial factors you’re trying to optimize, and then a few more unmentioned financial factors that I think you should include in the mix for decision-making.

Your mentioned factors:
1. Cash burn of $1,500 cost/month (aka unemployment)
2. $30K student loans
3. $15K savings

Your unmentioned factors:
1. Maxing out your Individual IRA when at you’re age 23
2. Finding work that covers your lifestyle costs and doesn’t leave you stressed out and unhealthy.

So…as far as important financial decisions in the next year, the most important is probably solving the issue of cash burn. You’ve got ten months, at your reported run rate, to solve that one (That’s $15K divided by 1.5K per month).
Ideally, you combine employment with the unmentioned factor #2, namely getting work that pays and keeps you healthy. Until you solve that one, I wouldn’t get aggressive about paying down your students loans.

Why do I say that?
If you decide to use your $15K cushion to pay down student loan debt, you shorten the time you have to get good, healthy work. Finding good work can take time. You don’t necessarily want to take another job that doesn’t suit you, and leaves you stressed out again, if you’re forced into the next job by the problem of running out of cash.
In addition, it’s very admirable to want to pay down your student loan debts with your savings, but in this particular situation I wouldn’t advocate that. Your student loan debt is low-interest debt, meaning it is compatible with good long-term financial decisions. (If you told me you had $30K in high-interest credit card debt, or any amount of credit card debt for that matter, I’d be strongly advocating paying that down as quickly as possible, as priority #1)
Then there’s another – in my opinion better – use for your savings if you’re trying to maximize your financial situation with your cash.

You didn’t mention contributing toward your $5,500 limit in an individual IRA. Hopefully you remember our discussion in class on the compounding effect of growing that money over the next 50 years. (Undoubtedly you can still do the math that shows your $5,500 becoming $101,311 fifty years from now at a reasonable 6% compound growth rate. Right? Please tell me yes.) Combine that with the 25% income tax relief you’d get on making a $5,500 contribution this year (so, up to $1,375 that you keep, not the federal government) and I think a strong case could be made for prioritizing your IRA contribution over student loan principal repayment.

Obviously you have to stay current on your student loans, but I don’t think its a bad idea to pay the minimal required amount, at least until you figure our your employment situation.

An implied part of my calculation here is that, given your education and past earning power, you’re capable of getting a high-paying job in the next year. The trickier part – in the long run – is finding a high-paying job that doesn’t leave you stressed and unhealthy.

My summary thoughts would advocate either of the following to routes:
The cautious approach – Hoard your cash long enough to get a good job, pay the minimum on your student loans, but don’t pay down principal on that debt until you’ve figured out how much your new job pays.

The more aggressive wealth-building approach – contribute generously to your Individual IRA (up to $5,500) and keep the rest in cash. That leaves you more like only 6 months to solve the cash burn problem (aka unemployment), but hopefully that’s enough time for a smart guy like you.

Feel free to write back and ask for more clarifications or even to challenge my assumptions.
Best of luck and keep me informed!

Michael